Undoing past wrongs can go horribly wrong too
PremiumThe NSE crisis is yet another example of an attempt to fix problems that turned into a problem itself
Russian President Vladimir Putin finally sent troops into Ukraine last week, disregarding entreaties and threats from other world leaders, even ignoring warnings of economic sanctions. As Putin tried to argue in his televised address, his broad aim was to set right some wrongs, what he considered deviations from historical trends. Putin’s sense of right and wrong differs from the rest of the world, and perhaps echoes the famous aphorism: “Where you stand depends on where you sit."
It is not yet known how Putin’s geopolitical moves will end, but, given his apparent delusions of grandeur, he will probably view every outcome as a success. Politics has that luxury, but sadly, public policy cannot afford similar ambivalence; public policy has defined objectives and remedial action can succeed only with long-term supervision and monitoring. When policy design backfires and corrective processes are put in place, the chances of a relapse are quite high, especially if the institution is held hostage by hubris and over-confidence. Multiple examples in India show curative measures going south after succeeding initially.
Stock exchanges, for example, have inserted themselves in the news for all the wrong reasons. In this season of spiritual consultants and transcendent corporate governance, it might be instructive to recall that when economic reforms were initiated over 30 years ago, an important component involved reforming India’s capital markets, specifically what was then known as the Bombay Stock Exchange and is currently identified as BSE Ltd. It was the main hub in a constellation of 22 stock exchanges, largest by the volume and value of daily transactions, and mired in a web of corrupt practices.
The National Stock Exchange (NSE) was launched with a completely new business model and governance structure, to right the BSE’s wrongs. NSE introduced institutional transparency, technology and risk mitigation to equity trading. The exchange was not limited by geography, and had an electronic order-matching system that could be operated from terminals anywhere in India. It was a de-mutualized bourse, so no broker owned a stake in the exchange, eliminating sources of conflict; in contrast, the BSE back then had operated like a brokers’ cabal.
The result was investor affection: the NSE’s relatively risk-free equity trading platform propelled its share of Indian capital markets to an overwhelming 9-10 times the BSE’s share.
But, today, the same exchange is battling multiple allegations. Created to right an egregious wrong, the NSE itself appears to have turned into an example of wrong-doing.
Success in correcting a deep-seated structural problem, as encapsulated by the BSE, perhaps lent its newer rival a sense of infallibility. The genesis of the NSE’s problem, perhaps, lay in the elevation of its dramatis personae to a status that lay beyond the reproach of any authority, be it the exchange’s board, the market regulator or even the government, the process aided and abetted by some influential directors and Delhi politicians.
A similar analogy may be found in the collapse of Infrastructure Leasing and Financial Services Ltd (IL&FS), which was seed-funded by a clutch of public-sector financial institutions and commercial banks. The institution was expected to bring private-sector credit appraisal and project-finance skills to infrastructure projects because existing term-lending financial institutions were more experienced in corporate project finance. From there to its current state, where a regulator-appointed board is now liquidating assets to pay off debtors, the IL&FS path to ignominy was paved with its senior executives’ arrogance and lack of accountability.
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In fact, the government’s repeated attempts to eliminate institutional gaps in project finance has failed to yield the desired results. The conversion of development financial institutions, which were the primary originators of long-term project finance, into commercial banks left a big void in the economy’s credit architecture, especially for financing ambitious infrastructure projects. The government repeatedly created new institutions to fill that gap: the Infrastructure Development Finance Corporation, India Infrastructure Finance Company Ltd, National Infrastructure Investment Fund and National Bank for Financing Infrastructure and Development. Former diplomat Jaimini Bhagwati commented in Business Standard recently that taxpayers have ended up paying the bill for the setting up of successive institutions and the debt overhang they left behind.
Another example is the Insolvency and Bankruptcy Code (IBC), which was expected to overhaul all the previous unproductive attempts at resolving the problem of industrial sickness and bad loans with commercial banks. The IBC is, of course, structurally a shade better than many of its previous avatars and its initial success in driving resolution in a couple of high-profile cases seemed to indicate that the right institutional solution was finally at hand. But, unfortunately, the IBC has not proved to be impervious to corporate finessing; even the government reverted to the mean by slowing down the resolution process. Consequently, the IBC’s working invited sharp words from the Supreme Court and even a parliamentary standing committee.
The idea of righting a past wrong is often attractive, prompting do-gooders to rush in with unworkable ideas. Second chances can and do often go wrong.
Rajrishi Singhal is a policy consultant, journalist and author. His Twitter handle is @rajrishisinghal.
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